TU PUEDES, TODOS PODEMOS SER EXITOSOS

The typical benefits for each major beneficiary are shown in Figure 6 (note that these are the primary costs and benefits that occur in typical circumstances only – other costs and benefits to these or other beneficiaries may also apply).

As outlined in Section 4.1, if the connection to the scheme is cost benefit justified and

voluntary, costs should be shared in proportion to the benefits to each party. If (and only if) the scheme is not commercially viable without subsidisation, funding may be sought from external funding partners, the government and/or the wider community.

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39. Figure 6: Pricing framework showing primary costs and benefits

* Net value may be positive (benefit) or negative (cost).

Potable water customers

(where substitution occurs)

Wastewater customer Recycled water user

Cost Benefit

Internal transfer between parties Recycled

water direct costs

Beneficiary Cost

Potable water charges Contribution method

Wastewater charges

Government grant/subsidy Wastewater/potable water charges Fixed charges

Volume charges

Reticulation costs

Land developer

(third pipe schemes)

Cash contributions Contributed headworks Contributed reticulation

Avoided potable water costs

less Avoided potable water charges

add/less Change in potable water reliability * Key benefits (where applicable)

Avoided wastewater costs

Other environmental/community benefits Community WTP (non-use)

less Downstream volume impacts

Benefits not captured elsewhere due to market failures or pricing constraints Avoided potable water charges

Value to customer (net of potable value)

less Land price premium

Land price premium Market value of resource Other incremental costs Beneficiary Market failure Community/environment Subsidy only if commercially unviable

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40.

Recycled water users

The benefit to recycled water users will be equal to their willingness to pay for recycled water (see ‘Use value’ in Section 3.3 for more details). The willingness of users to pay for recycled water will rarely be directly revealed, but in some cases can be inferred.

If the recycled water substitutes for potable water, then the users’ willingness to pay will be limited to the potable water price plus or minus the change in value to the customer. The change in value may, for example, result from changes in the reliability of the water supply, the

different water quality characteristics or changes in the level of risk.

Where recycled water is not a substitute for potable water, the customers’ willingness to pay for recycled water can potentially be inferred from the cost of alternative water sources (e.g. water trading, groundwater), from the losses that would be incurred if a water supply is forgone (e.g. through an analysis of irrigated compared with dry land farming margins) or from the cost of implementing water saving measures.

The recycled water user’s willingness to pay for recycled water will also be reduced to the extent that additional costs must be incurred to access the recycled water, such as additional treatment or plumbing costs.

Recycled water charges can include fixed and volumetric charges. In accordance with established economic theory, the volumetric charge should send a pricing signal to recycled water customers regarding the marginal cost of consumption. The volumetric price should, as a minimum, reflect the short or long run marginal cost of increasing or decreasing consumption, but with more sophisticated analysis may also reflect the product’s scarcity value. The fixed charge should then be determined to ensure that the total charge to the customer does not exceed their share of total costs.

For third pipe schemes, property owners may also pay an initial land price premium for land with access to recycled water, as demonstrated in the Rouse Hill hedonic pricing study conducted as part of this study. The benefit to developers may also include any present value ‘premium’ obtained from selling lots at a faster rate.

The land price premium will be a benefit to the developer but an additional cost to the property owner.

Wastewater customers

Wastewater customers may benefit to the extent that wastewater capital and operating costs are avoided (see ‘Avoided wastewater costs’ in Section 3.3 for more details). This benefit will be particularly important in cases where the alternative wastewater disposal options are limited or costly.

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41.

Potable water customers

Where the recycled water scheme substitutes for potable water, the potable water scheme operator may benefit by avoiding capital augmentations and operating costs (see ‘Avoided potable water costs’ in section 3.3 for more details). However, offsetting these benefits will be the reduction in potable water revenue that would otherwise have been paid by the recycled water customer. In practice, the reduction in potable water revenue will increase the proportion of the water service provider’s costs that must be met by remaining potable water customers. If potable water consumption charges have been set at the Long Run Marginal Cost (LRMC), the reduction in revenue should exactly offset the avoided costs, implying that potable water customers that are not supplied with recycled water will see no net impact on their water bill (see Appendix 4 for a simplified cash flow example demonstrating that potable water bills would remain unchanged). Potable water customers should only pay extra to subsidise a recycled water scheme if the water service provider has made an explicit contribution to the recycled water scheme based on the community’s willingness to contribute to the scheme (see Community willingness to contribute (non-use)’ in Section 3.3).

If potable water consumption charges have not been set at the LRMC, potable water bills will be impacted. If consumption charges are higher than the Long Run Marginal Cost (as is currently the case in many Australian cities), then recycled water schemes that remove demand from the potable water scheme will also remove more revenue that costs. If the potable water scheme is regulated, the charges to remaining customers will increase to cover this revenue ‘hole’. However, the increase in water bills would be a result of misaligned (and therefore

economically inefficient) tariffs rather than any underlying financial benefit to potable water customers.

Potable water customers may also be impacted by a change in potable water supply reliability, as noted under ‘Other environment/community benefits’ in Section 3.3. As noted in that section, the impacts on water supply reliability could be positive or negative depending on the timing and size of potable scheme augmentations.

Community and environment

If the scheme is economically viable from a whole of community perspective, but the contributions from recycled water users, wastewater customers, potable water customers and land developers are not sufficient to fund the scheme, proponents should in the first instance seek funding from potential funding partners such as agencies responsible for the management of environmental or health services. In some cases, these agencies may directly benefit from the recycled water scheme by avoiding other environmental or health management costs, while in other cases the agency may be prepared to contribute funds as a means of achieving the broader objectives of their organisation.

Where funding remains insufficient to recover the costs of the scheme, there may be a case for government or the community to contribute the remaining funding for the scheme.

Contributions from the water service provider customers (through increased water and wastewater fixed charges) may be appropriate where the water service provider’s customers have demonstrated a willingness to pay for recycled water, even if they do not directly use the recycled water themselves (see ‘Community willingness to contribute (non-use)’ in Section 3.3).

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42. In addition, subsidies from government may be appropriate, for example:

 to achieve other government objectives such as stimulating the market, encouraging research and development or protecting certain groups in society - the objectives of government should be clearly defined and ideally quantified within an economic framework wherever possible;

 if recycled water prices are constrained (e.g. through postage stamp pricing) and do not allow the scheme owner to recover the full ‘willingness to pay’ value from each individual customer, then government may agree to contribute to the scheme to realise the full value to the community;14

 if other market failures have distorted either consumption or investment decisions, leading to sub-optimal outcomes for the community.

To reflect the whole of community position, the government’s contribution should be reduced to the extent that downstream users are negatively impacted by the reduced wastewater discharge volumes (see ‘Downstream volume impacts’ in section 3.3).